Asian stocks opened on a positive note after the S&P 500 ended flat, following the Federal Reserve’s “moderate” policy outlook. Despite US interest rates being lowered by 25 basis points for the second time this year, which confirmed market expectations, the Dollar index (DXY) spiked 0.4 percent before moderating. This left most G10 and Asian currencies in the red, while Gold tumbled 1.6 percent to fall below the psychologically-important $1500 level.
Fed chair Jerome Powell once again reiterated that the recent policy easing measures serve as “insurance” in protecting US growth momentum, pushing back against the more dovish calls for deeper rate cuts. Still, persisting US-China trade tensions, geopolitical conflicts, and cooling global growth threaten to tip Fed officials towards a more dovish stance over the coming months, especially if such downside risks continue taking their toll on the US economy.
Fed’s policy outlook to have far-reaching consequences on Dollar, Asian central banks, market volatility
Should markets get the sense that more US interest rate cuts are warranted, despite Fed officials telling markets otherwise, that could lead to more softness in the US Dollar while offering some reprieve for G10 and Asian currencies. Asian policymakers are also expected to continue taking their cues from the Fed, whereby more US interest rate cuts should offer added room for Asian central bankers to ease their respective policy settings further.
Besides being occupied with economic data and external events in trying to determine the Federal Reserve’s policy path forward, investors will also have to pay attention to another variable: dissension within the Federal Reserve. Should Fed officials continue conveying mixed policy outlooks to global investors, that could trigger bouts of volatility as markets contend with the uncertain projections surrounding US interest rates.